The accountancy firm KPMG has said that it is predicting that over 130,000 people are going to be declared bankrupt or enter into individual voluntary arrangements with their lenders. This will be up from the 109,615 who did the same last year.

When people enter into individual voluntary arrangements (IVA) they are allowed to restructure debts such as personal loans, credit cards and hire purchase so that their debts can become more manageable. Monthly repayments are made for a fixed period of time with the remainder of the debt being written off at the end of the period.

It is estimated that as many as 2,500 people have debt in excess of £100,000. In 2007 the average amount owed by individuals entering into IVAs was £50,300.

KPMG found that the average repayment for a loan on an IVA was 38% of debt. The average debtor repaid £19,000 of their debt and as a result £1.3bn had to be written off by creditors.

The high average level of debt indicates just how bad lending has been in the past few years. Most debtors owe so much that they have no realistic way of actually repaying their debt.

The company which is called the IVA Council (IVAC) is claiming that thousands of people in debt are each year being poorly advised on how to clear their debt. The IVAC also claims that thousand of indebted customers are being herded into formal debt agreements called Individual Voluntary Agreements (IVA) by creditors.

The company argues that these people should not end up living in poverty desperately trying to clear their debts but instead opt for bankruptcy. The debts could be on mortgages, personal loans, credit cards or utility bills, but the advice is the same each time: default.

The IVAC has mailed thousands of customers of debt advice services across the whole banking sector. The IVAC managed to get these details by buying them off the government-backed agency the Insolvency Service. This has prompted calls for the database to be made less readily available to the public.

Some recipients of these letters from the IVAC have complained that some sensitive information is clearly available in the display in the letter envelope.

IVAC has also set up a website that appears to be an almost exact copy of the Insolvency Service’s website. The company is also allegedly using an old logo of the Department of Trade and Industry (DTI) despite the fact that the DTI changed its name to the Department for Business Enterprise and Regulatory Reform last year.

The truth is that no one can escape their responsibilities and IVAs and bankruptcy are very serious measures that impact upon future credit for many years.  They rarely mean that debts can be avoided. Instead the debtor is expected to repay loans and bills at an agreed rate, whilst living on the very same reduced income that this rogue company claims to help avoid.

The figures which were released by the Insolvency Service show that 26,072 people were declared insolvent in the three months after the credit crunch hit. This is a fall of 3% on the number of insolvencies in the previous quarter and a fall of 5% of the same period the previous year.

While the number of bankruptcies had increased by 2.2% on 2006 to a total of 15,833, the number of individual voluntary arrangements (IVAs) was actually down by 14.3% to 10,239. The large drop in IVAs, which allow borrowers to write off some of their debt in return for creating a payment schedule with creditors, could be explained by the fact that most lenders dislike the schemes since they are then forced to write off bad debts. With banks needing to claw back as much money as they can, they are refusing to allow personal loan and credit card customers to ‘go bad’.

While it is not clear which lenders were behind the majority of rejections for IVAs it is believed that Northern Rock is on of the main contributors rejecting all applications for IVAs. This is unsurprising, given its recent history.

HSBC has also changed its policy to IVAs. In the past, repayments for IVAs came in somewhere around 25p for every £1 owed to the lender. HSBC has now upped its threshold to 40p for every £1 borrowed.

As a result of these changes borrowers are now more likely to enter into debt management plans with their creditors.

Under the terms of an IVA, if you own greater than £15,000 you can try and reach an agreement with your lender in which you only pay back a percentage of the loan or all of it, but the interest charges are frozen.

In the first 3 months of 2007, 11,300 Britons entered into such agreements with their lenders. That is a 50% rise one the same period in 2006 and goes to show how difficult many households are now finding it to deal with debts held in personal loans and credit cards.

However the problem is that now many lenders are taking an increasingly tough line on accepting IVAs. It used to be the case that many lenders would accept repayment on 25% of the loan or debt, however now that figure has gone up drastically and it is becoming increasingly difficult for many borrowers with severe debt problems to even repay their IVAs.

For example HSBC will now only accept an IVA if the borrower agrees to pay back a minimum of 40% of the loan while the student loan company will not allow their debt to be subject to any form of IVA or bankruptcy.

Northern Rock should use its own example when considering individuals in debt crisis. The crisis-hit bank rejects IVAs as standard practice. This is now becoming common practice from many lenders.

The problem arises from the fact that in order for many of these borrowers to be able to repay their existing debt they need their lender to freeze the debt they currently have, in effect stop charging interest on their credit card or loan. This will than give the borrower a much higher possibility of repaying the loan instead of going into bankruptcy. If a borrower was to be declared bankrupt, then the bank certainly wouldn’t get all its money back.

In order to freeze debt the borrower must enter into an agreement with the bank. However many lenders do not like to do this as they view these agreements as losing them money – the interest that they make their profit on.

Many borrowers cannot afford to repay any more than the minimum repayments on their credit card each month. This means the possibility of actually clearing their debt is almost impossible, as interest repayments become a larger and larger part of the debt (monthly credit card interest often matches the minimum repayable, so the debt doesn’t diminish).

Applying for an individual voluntary arrangement (IVA) is one way of solving your debt problems. Under these agreements, those owing over £15,000 agree to repay a percentage of all of the money owed typically over a period of five years.

The trick is in negotiating with lenders to freeze interest repayments. This in effect prevents the debt from growing any further. However many lenders refuse to enter into these agreements.

The move is to reduce the number of older people who are living dangerously below the poverty line.  Today’s 65+ age group are still making mortgage payments. This is something that was not seen a couple decades ago when pension levels were established.

The government wants to protect these people, but at the same time, they are not willing to accept responsibility for paying their mortgages.  Reports from charities like Citizens Advice claim that many people are left with less than 50 pounds a week to live on after they pay their mortgages and utilities.

The problem is likely to increase as the banks extend the age limit for lending.  They are already lending mortgages to people who will need to live to be 120 years old if they expect to repay the loan.  As people age, and their medical demands increase, they will not be able to repay their mortgages or the personal loans secured against their home. This will leave many struggling, or heading to bankruptcy court.

As insolvency levels increase, and the bank of England is preparing to increase the interest rate two more times this year, many pensioners are forced to leave their homes, defaulting on their mortgages, and depend on the charity of their children.

The Institute of Payroll Professionals (IPP), is seeing an increasing number of websites which now offer ‘duplicate’ payslips, without taking time to check whether the customers information is valid.

These websites cannot legally verify the details provided by consumers looking to buy fake pay slips as the only official parties who would prove salary information – the payroll departments of their employer and the HMRC – are bound by the Data Protection Act,” the IPP website confirms.

This will increase debt and insolvencies as more homeowners are struggling to make payments they cannot afford. Analysts are worried that, if this becomes a wide spread practice, that it will create a false image of the economy as more and more people apply for bankruptcy and IVAs.

Richard Fiddis, Managing Director, at the global information solutions company Experian, said:

“Insolvencies rose by two-thirds in the second quarter of this year, while IVAs, which make up almost half the total, soared by over 150 per cent.”

“One of the most striking differences between those opting for bankruptcy and those for an IVA is illustrated by socio-economic analysis,” continues Fiddis. “Experian’s Mosaic consumer segmentation system shows that people in the ‘Happy Families’ group, comprising largely young families, are more than 60% more likely to be tempted by an IVA.”

These numbers will increase as people continue to ‘fake’ mortgage and personal loan applications.